Analysis of Key Issues Subject to Penalties

(1) Analysis of Violations of Assessment Guidelines and Key Provisions
In the penalty cases, violations of 23 assessment guidelines and 193 specific provisions totaled 1,109 instances. The guidelines with the highest number of violations were: "Guidelines for Asset Valuation Practice—Asset Valuation Procedures," "Guidelines for Asset Valuation Practice—Asset Valuation Reports," "Guidelines for Asset Valuation Practice—Asset Valuation Files," "Basic Guidelines for Asset Valuation," and "Guidelines for Asset Valuation Practice—Enterprise Value," with 279, 165, 162, 112, and 101 violations, respectively.
Table 27: Statistical Table of Violations of Evaluation Guidelines in Penalty Documents, 2021–2023

    1. Analysis of Violations of the Basic Standards for Asset Valuation
The provisions involved cover 16 articles, with Article 5 appearing most frequently—73 times, accounting for 41.01%; followed by Article 9, which appeared 41 times, accounting for 23.03%; and then Article 13, which appeared 18 times, accounting for 10.11%.
Table 28: Statistical Table of Violations of the “Basic Standards for Asset Valuation”

    2. Analysis of Violations of the “Code of Professional Ethics for Asset Valuation”
It involves two articles: Article 4 appears 14 times, accounting for 87.5%; Article 13 appears twice, accounting for 12.5%.
Table 29: Statistical Table of Violations of the Code of Ethics for Asset Valuation

    3. Analysis of Violations of the “Asset Valuation Practice Guidelines—Asset Valuation Procedures”
The provisions cover 18 articles, with Article 12 appearing most frequently—137 times, accounting for 19.80%; followed by Article 19, which appears 133 times, accounting for 19.22%; and then Article 7, which appears 97 times, accounting for 14.02%.
Table 30: Statistical Table of Violations in the “Asset Valuation Practice Guidelines—Asset Valuation Procedures”

    4. Analysis of Violations of the “Asset Valuation Practice Guidelines—Enterprise Value”
The provisions involve 22 articles, with Article 5 appearing most frequently—33 times, accounting for 14.22%; followed by Article 37 and Article 11, each appearing 31 times, accounting for 13.36%.
Table 31: Statistical Table of Violations in the “Asset Valuation Practice Standard—Enterprise Value”

    5. Analysis of Violations of the “Asset Valuation Practice Standards—Real Estate”
The provisions involved total 14 articles, with Article 19 appearing most frequently—7 times, accounting for 13.73%; followed by Articles 12, 17, and 18, each appearing 6 times, accounting for 11.76%.
Table 32: Statistical Table of Violated Provisions in the “Asset Valuation Practice Standards—Real Estate”

    6. Analysis of Violations of the “Asset Valuation Practice Guidelines—Intangible Assets”
The provisions involve 16 articles, with Article 18 appearing most frequently—19 times, accounting for 26.76%; followed by Article 22, which appears 14 times, accounting for 19.72%; and then Article 19, which appears 7 times, accounting for 9.86%.
Table 33: Statistical Table of Violations in the “Asset Valuation Practice Guidelines—Intangible Assets”

(2) Analysis of Key Issues in the Internal Governance and Quality Control System of Asset Valuation Firms
Among the 216 asset valuation agencies that were penalized, a total of 19 agencies were penalized 46 times for issues related to internal governance and quality control. The specific reasons for these penalties mainly include inadequate implementation of internal management systems, reliance on borrowed personnel, insufficient review procedures, and failure to establish and improve robust quality control systems.
Table 34: Statistical Breakdown of Specific Reasons for Penalties Related to Internal Governance and Quality Control Issues

(3) Analysis of Key Quality Issues in Asset Valuation Services
The key quality issues in asset valuation services, ranked from highest to lowest proportion, are as follows: missing valuation working papers, missing valuation procedures, non-compliant or unreported valuation reports, calculation errors caused by insufficient understanding of indicator calculations, failure to conduct a thorough analysis and judgment on the reasonableness of client-provided materials, incorrect valuation scope (omitted items), inappropriate valuation methods, and other issues.
Table 35: Descriptive Statistics on Key Quality Issues in Asset Valuation Services

1. Missing audit working papers
The inspection revealed that 350 reports were missing their original drafts (including both management and operational types), accounting for 59.73%.
(1) Main issues with management-related working papers
① The assessment plan is either missing or overly simplistic and lacks specificity; some items are missing or incompletely described in the assessment plan; the assessment targets and scope are incomplete.
② There is a lack of clear assessment of fundamental business matters, evaluation of business acceptance risks, and documentation for customer report acknowledgment. The working papers fail to reflect the company’s quality control system requirements for the acceptance process.
③ The review process is merely a formality with no substantive content; there are no records of how major issues identified during the review were addressed in the draft documents, and the draft documents fail to reflect the quality review process conducted by the asset valuation agency.
④ The filing of working papers is not standardized, and their content completeness and consistency in archiving are poor. Working papers lack index numbers and page numbers; some electronic documents have not been archived at all; and the archives are not stored in accordance with prescribed regulations.
⑤ Lack of records for analyzing and evaluating business capabilities and independence.
⑥ Some documents are unsigned, the date at the signature line is left blank, and key elements are incomplete. Examples include risk control documents, project work plans for assessments, report review forms, asset valuation engagement contracts, questionnaires on basic matters related to assessment services, professional competency analyses, and on-site inspection records.
(2) Main issues with operational working papers
① There is a lack of necessary on-site investigation records, or the on-site inspection records are incomplete, and in some cases, on-site investigation methods that are not appropriate for the assessed project have been employed. For example, there are no on-site investigation records for key buildings or critical equipment; written inspection records documenting the current condition and usage status of the assessed objects have not been prepared; there are no verification records of technical documentation related to major assets, nor are there on-site inspection records detailing the current condition of major assets; in a few instances, inventory counts were not conducted using the back-to-front method, and there are no records of goods entering or leaving the warehouse between the inventory count date and the valuation base date, nor any associated inspections; furthermore, a small number of on-site inspection record forms lack signatures.
② Lack of interview records. In business valuation and individual asset valuation engagements, there is either a lack of interview records with relevant personnel, or the interview records are overly brief, lack specificity, and contain no substantive content.
③ Records of important procedures such as inquiries, confirmations, physical inventory counts, and site inspections are incomplete or contain errors. There are no confirmation letters for bank deposits and related parties, or the confirmation letters from auditing firms are directly copied without verification.
④ The collected assessment materials are incomplete. The draft assessment documents lack comprehensive and detailed information on the enterprise’s human resources, technological level, capital structure, operational status, historical performance, development trends, macroeconomic factors, the current state and future prospects of the industry in which the enterprise operates, as well as the allocation and utilization of assets. Moreover, the projections of future earnings are not supported by sufficient macro- and micro-level data. Records of inquiries regarding key assets and information on pricing basis are incomplete. Furthermore, documentation related to asset ownership is also incomplete.
⑤ The asset valuation declaration details are available only in electronic format, with no printed hard copies bearing official seals. Additionally, the information filled in on the valuation declaration details is either incomplete or lacks the applicant’s official seal for confirmation.
⑥ The valuation working papers under the income approach contain insufficient analysis of the underlying assumptions and the process used to determine key values. The working papers do not include records verifying or adjusting for non-recurring revenues and expenses, non-operating assets, liabilities, and surplus assets from the company’s historical data, nor do they adequately address the related revenues and expenses. The assumptions underlying revenue and cost/expense forecasts are inadequate. The analysis and calculation processes for working capital, as well as the analysis of surplus assets, non-operating assets, and liabilities, are insufficient. Furthermore, the basis for selecting and determining certain parameters is lacking.
⑦ The working papers for the market approach valuation lack an analysis and judgment of the industry development status and prospects of the entity being valued; they also fail to take into account the impact of liquidity on the valuation outcome; the description of comparative case information is insufficient; and neither a table of comparative factor conditions nor a table of comparative factor condition indices has been prepared.
⑧ The sources and formation processes of key parameters used in the cost-based valuation working papers were not disclosed; there is no relevant information on the components that make up the replacement cost; there is no relevant information on how the rate of depreciation was determined; the considerations, basis for selecting values, and formation processes for various depreciation factors were not disclosed; the calculation procedures and results were not disclosed; records of the main asset valuation calculations and their results were not reflected; the sources and formation processes of the replacement cost components and key parameters were not disclosed.
2. Missing assessment procedure
The inspection revealed that 297 reports lacked the required assessment procedures, accounting for 50.68%. The main issues include:
(1) Before accepting an asset valuation engagement, the asset valuation agency failed to clearly identify the client, the property rights holder, and other users of the asset valuation report beyond the client; failed to specify basic engagement details such as the purpose of the valuation, the valuation object, and the scope of the valuation; and failed to conduct a comprehensive analysis and evaluation of its professional competence, independence, and business risks.
(2) The asset valuation engagement contract was not properly drafted. For example, it failed to specify the rights and obligations of both the asset valuation agency and the client, as well as provisions on breach of contract liability and dispute resolution; it lacked the name and contact telephone number of the client’s designated contact person; the signing date was not specified down to the month and day; and the stated purpose of the valuation was unclear.
(3) The asset valuation plan was not prepared based on the specific circumstances of the asset valuation engagement. For example, the asset valuation plan was incomplete; or no substantive review was conducted.
(4) No on-site investigation was conducted on the appraisal object; no verification or validation was performed on the information used in the asset valuation activities.
(5) The corresponding formulas and parameters were not selected for analysis, calculation, and judgment; no records of the calculation process or results were kept; and in cases where the assessment conclusions appeared abnormal, no further analysis was conducted.
(6) The working papers, asset valuation reports, and other relevant materials have not been organized. For example, the records of basic details of the asset valuation engagement in the assessment working papers lack information on the scope of use of the asset valuation report; there are no records indicating the signatures of the person who conducted the business negotiation or the responsible person from the asset valuation agency; no index numbers have been assigned, and no statutory retention periods have been marked.
    3. The format and content of the asset valuation report are not standardized.
The inspection revealed that 287 reports had irregular formats or content, accounting for nearly 50%. The main issues include:
(1) The statement required in the asset valuation report is missing. For example, the basic asset valuation standards, professional ethics guidelines, and asset valuation practice guidelines upon which the asset valuation report is based have not been filed.
(2) The asset valuation report lacks important items and essential elements, or its explanations are inconsistent and unclear. For example, it may lack assessment assumptions and an analysis of the applicability of valuation methods; fail to describe the basic information of the client and the entity being valued; omit an introduction to the entity’s basic information and financial condition; or have an unclear or inappropriate description of the report’s purpose, subject, scope, assumptions, and type of value.
(3) The legal and regulatory basis, normative basis, ownership basis, and valuation basis adopted were either not specified or have become invalid. For example, the selected valuation method and its rationale were not explained; the sources, analysis, comparison, and calculation processes of relevant parameters were not disclosed; and the key activities carried out during the process—such as on-site investigations, collection and compilation of appraisal data, and assessment and estimation—were not documented.
(4) Irregular disclosure of special matters. For example, appraisal reports prepared for financial reporting purposes fail to disclose records indicating whether the appraisal methods used in this appraisal are consistent with those employed in the previous appraisal; fail to disclose whether the asset groups or combinations of asset groups have changed between this appraisal and the previous one; disclose data that is incorrect, inaccurate, or incomplete; fail to disclose other special matters, such as pending issues, legal disputes, and other uncertainties; fail to disclose significant instances of reliance on expert work and related reports; fail to disclose information about limitations encountered during the appraisal procedures, the remedial measures taken by the asset appraisal agency, and the impact of these limitations on the appraisal conclusions.
(5) No instructions on usage restrictions are provided. Some reports lack information on the scope of applicability of the assessment conclusions.
(6) The attachments to the asset valuation report are incomplete. For example, key ownership documentation pertaining to the valuation object is missing; commitment letters from the client and other relevant parties are absent; the consolidated or detailed table of asset valuation is lacking; or the filing documents or qualification certificates of the personnel at the asset valuation agency are not provided. Furthermore, there is a significant discrepancy between the book value of the assets and the valuation conclusion, yet no explanation has been given to account for this difference.
(7) Statements containing irrelevant content.
    4. Calculation errors caused by insufficient understanding of the assessment methodology theory.
The inspection revealed that 250 reports contained calculation errors, accounting for 42.66%. The main issues include:
(1) Main issues with the market approach.
① Insufficient understanding, selection, and calculation of valuation parameters in the market approach—for example, rates of return on invested capital, earnings growth rates, cost of capital, tax rates, and growth rates.
② The selection of transaction cases used as reference objects is unreasonable. For example, the number of selected cases is too small, or their comparability and similarity are poor, resulting in significant differences in transaction prices.
③ Missing corrections for individual factors, transaction dates, remaining useful life, and other parameters, or incorrect calculation of correction coefficients.
(2) Main issues with the income approach.
① The forecast of future earnings contains structural errors and calculation errors in certain parameters. For example, in an appraisal conducted for financial reporting purposes, deductible input tax that does not belong to the asset group was included in the cash flow projection, resulting in a deduction of financial expenses while simultaneously adding back interest expenses after income tax deductions. Additionally, there were errors in parameters such as the royalty rate for intangible assets, labor cost expenses, the floor area ratio adjustment factor used in land-use right appraisals, and cash costs.
② Incorrect algorithms for discounting period and income period.
③ The discount factor was calculated incorrectly. For example, when adjusting the beta of comparable companies to remove financial leverage, the impact of income tax was not taken into account.
(3) Main issues with the cost method
① The composition of the replacement cost is unreasonable. For example, if the consolidated financial statements are used, minority shareholders’ equity has not been deducted; the replacement value does not take into account value-added tax; and the proportion of fixed costs to variable costs after capacity expansion has not been considered.
② Incorrect values and miscalculations of replacement cost parameters. For example, if the assessed land parcel falls within the 7th grade of the benchmark land price, the linear interpolation method used to calculate individual data applied the correction coefficient for the 6th grade; during the calculation of the land-use term adjustment, the remaining term was calculated incorrectly; there was no relevant basis for determining the values of construction and installation costs, professional fees, pre-construction expenses, infrastructure construction costs, and public supporting facilities construction costs; and it is unreasonable to determine cost estimates based on average prices.
③ Price index adjustment has not been performed.
④ Incorrect calculation of the depreciation rate.
    5. The reasonableness of the information provided to customers has not been thoroughly analyzed and assessed.
The inspection revealed that 58 reports failed to analyze and evaluate the relevant data, accounting for 9.9%. The data involved primarily included ownership certificates, financial statements, accounting vouchers, price information, and related professional reports.
(1) Main issues with ownership documentation
① The land ownership was not verified and documented, resulting in an incorrect assessment scope.
② The proportion of property rights documentation in the overall documentation is insufficient, and it fails to adequately substantiate the ownership relationship.
③ Failed to pay attention to the current status and legal ownership of the entrusted party. Did not analyze or assess the property rights situation of real estate closely associated with the subject, nor did it include such properties in the scope of the assessment.
④ The economic transaction documents provided by the client explicitly stipulate the equity transfer price for this project, and the valuation conclusion is substantially consistent with the already specified transfer price.
(2) Main issues with financial accounting information and data
① The trends in financial statements and the composition ratios of financial indicators were not analyzed, and the data for each item in the financial statements was not reconciled with the relevant ledgers. For example, the entire net profit of the entity being evaluated was not analyzed before being directly discounted; nor were the expected changes and the useful life related to the lease rights reasonably analyzed and determined, nor were the costs and expenses associated with the income, supporting assets, cash flows, and risk factors appropriately assessed.
② No verification was conducted on various documents related to cash, negotiable instruments, and physical assets. For example, when an asset holder provided a new declaration list, the data from that list was used directly without first being verified and validated.
③ No verification letters were sent to confirm various types of information related to bank deposits, off-site inventories, accounts receivable and payable, and trading financial assets. For instance, given that the total acquisition expenditures of the assessed forecast object are substantial, no necessary analysis or judgment was conducted regarding the sources of funds for these large expenditures or the entity’s financing capacity.
④ No necessary analysis or explanation was provided regarding the potential impact of guarantee loss liabilities that may arise during the company’s remaining term of coverage, as well as the essential operating costs incurred by the company after cessation of business, on the valuation conclusion.
(3) Major Issues in Future Indicator Forecast Data
The forecast data provided by the company being evaluated and the client were used directly as evaluation parameters without conducting the necessary analysis and judgment. For example, the operational forecast data provided by the client was directly adopted as the projected figures for revenue, net profit, and gross profit margin—figures that exceeded those presented in the client’s business plan—and no adequate analysis or judgment was made regarding the discrepancies between these projections and the original data.
    6. Incorrect assessment scope (omitted items)
The frequency of errors in the assessment scope is relatively low, accounting for only 4.27% of the total number of issues. The main issues identified during the inspection are:
(1) The assessed object and scope are inconsistent with the terms of the entrusted contract.
(2) The description of the assessment object and scope is unclear. For example, there is no detailed description of the completeness and degree of completion of the real estate’s internal supporting facilities, nor is there any disclosure regarding whether the real estate (land use rights) is subject to mortgages or other restrictions. Additionally, some items in the asset valuation detail table lack specific names and key parameters, making it impossible to link them to specific asset items, thus resulting in an unclear scope of the asset valuation.
(3) Omission of significant asset items. The primary assets omitted in the appraisal were intangible assets, such as trademark rights, copyright, domain names, and patents. In some individual appraisal engagements, inventory was also omitted.
(4) Assets that should not have been included in the assessment scope were nevertheless included. For example, the additional compensation fee for land-use rights should not have been included in the assessment scope, yet the assessment report did include this fee.
    7. Inapplicability of the assessment method and other issues
There are a total of 22 other types of issues, primarily involving the following problems: inappropriate selection or insufficient basis for the evaluation method; inconsistencies between the estimation approach and the selected evaluation method; discrepancies between the applicability analysis of the evaluation method and the method chosen for the assessment calculation; the evaluation methods employed failing to fully reflect the asset’s value; and insufficient justification for the selection of specific methods.
V. Conclusion
From 2021 to 2023, the number and severity of financial regulatory penalties imposed on the asset valuation industry significantly increased, and stringent regulation is set to become the new normal and a long-term trend. At the same time, asset valuation firms have been growing rapidly, intensifying market competition. Some asset valuation firms suffer from inadequate internal governance, superficial quality control measures, insufficient professional competence, and questionable practice quality.
Asset valuation agencies should strengthen their internal governance, strictly comply with relevant laws and regulations as well as asset valuation standards, establish and improve quality control systems and risk prevention mechanisms, and ensure the quality of their professional practice. Asset valuers should cultivate a strong quality mindset, enhance their professional competence, and diligently and responsibly fulfill their obligations in performing valuation work.
Industry regulators should adhere to a problem-oriented approach, promptly revise relevant laws and regulations on asset valuation, and refine the industry’s top-level design. They should establish and improve a supervisory mechanism featuring horizontal coordination and vertical linkage, fully leveraging the combined strength of regulatory efforts. Regulators should innovate their supervisory concepts, refine supervisory methods, and promote the establishment of a regulatory model that integrates online supervision with on-site inspections, routine checks with special-purpose inspections, and compliance reviews with targeted investigations into violations. This will facilitate the implementation of “Internet + Regulation” and enhance regulatory efficiency. Furthermore, regulators should strengthen the application of inspection results by publicly exposing typical cases discovered during oversight, thereby deterring illegal activities.

[Note]
1. Statistical period: January 1, 2021 – December 31, 2023.
2. Statistical Scope: The year of the penalty, the content of the penalty, and the violated provisions shall be determined by the dates and details specified in the Administrative Penalty Decision and the Self-Disciplinary Punishment Decision. For statistical indicators related to the characteristics of asset valuation agencies, asset appraisers, and asset valuation reports, the data from the Unified Information Platform for the Asset Valuation Industry shall prevail.
3. Other Notes: Statistical information is based on the date when the penalty decision documents are issued. For example, the number of administrative penalty decisions issued by the Ministry of Finance in 2021 was recorded as 0 because the joint inspection conducted by the Ministry of Finance in 2021 resulted in the issuance of administrative penalty decisions in 2022; thus, these cases were included in the 2022 statistics. Since 2021, joint inspections have adopted a “one inspection, two penalties” approach. Therefore, in data statistics, the counting units are “instances” and “person-times.”